Newton: what price does your Brexit procrastination carry?

This weekend EU leaders will meet to discuss the UK’s final Brexit terms as headlines continue to ricochet between high anticipation and dashed hopes of a deal. The prospect of high import tariffs, labour shortages and a bonfire of regulations with a no-deal Brexit is still very much a possibility, and the UK retail sector remains in a state of limbo.

Just weeks ago, the British Retail Consortium’s (BRC) Europe and international policy advisor William Bain warned that a no-deal Brexit could see World Trade Organisation’s ‘most favoured nation’ tariffs applied to everything coming in from the EU. This would mean an extra 12% on clothing, 39.6% on Irish beef, 21% on Dutch tomatoes and 45% on Italian mozzarella cheese, to name but four affected product areas.

In July, BRC chief executive Helen Dickinson responded to the government’s so-called “Chequers” proposal by underlining the retail sector’s reliance on a “frictionless customs system” for the “fragile food supply chains”. She also highlighted that some 170,000 EU nationals are employed across retail in various roles, making access to EU workers essential.

And the potential for major disruption is also making retailers nervous. Sir Charlie Mayfield, chairman of the John Lewis Partnership, which posted a dive in pre-tax profits of 98.8% for the six months to July 28 this year, has warned of the difficulties in forecasting as the Brexit clouds gather. Aldi has also asked suppliers to brace themselves for the impact.

While we all knew the outcome of the Brexit vote on 23 June 2016 would pose a challenge for the retail industry, few seemed to predict the battle that has since ensued. The government is pushing its agenda and the EU is pushing back, if not harder. So, what can we do?

Whatever the reality, retailers and their supply chains must prepare now for every scenario – and remember if the UK crashes out of the European single market on March 29, 2019, it is also likely to fall out of the 50-plus free trade agreements that the EU holds with other countries around the world.

We estimate that the average tariff on raw materials imported into the UK will be around 5%, likely to be exacerbated by volatile exchange rates. Any rises will either have to be absorbed or passed onto shoppers – something retailers and brands are reluctant to do, particularly following the “shrinkflation” backlash we witnessed in the few months following the referendum.

Retailers can and must look at their supply chains now. Can they swap imported products for home grown/made equivalents? This question is particularly pertinent for food retailing: 50% of Britain’s food is imported and, of that, 60% comes from the EU-27.

We know that challenging the specifications that food manufacturers buy to can save 2-5% of raw material cost at a category level without adversely impacting product quality or back-of-pack product declarations. And a recent piece of work saw changes in the production process and the reformulation of fresh product recipes. There was no change to back of pack, or reduction in quality in blind trials. The result? Material cost savings of more than 10%.

Of course, one of the biggest challenges is likely to be meeting labour demands – particularly in a no-deal scenario. While the government has made assurances that EU citizens already here will have the right to remain, the details are uncertain and the status of recently arrived workers is still unclear. Aside from the aforementioned 170,000 EU migrants already employed across all areas of retail, when we look at the bigger picture, some 98% of the food industry’s seasonal workers come from the EU, meaning our ability to meet peak demand could be threatened.

Plans to increase the numbers of permanent staff need to be in progress now. This could mean payroll increases, but ensuring current employees are working efficiently – which is always essential – has the added incentive of reducing the labour burden when it is likely to become more scare. Typically, we find opportunities to reduce direct labour by 10-15% through optimising shop floor operations.

Retailers should be working now with the suppliers likely to be impacted to agree a plan or sourcing alternatives. It’s essential to understand the true supply costs of products and how this breaks down (e.g. the cost for each individual raw material, processing costs, labour, transport, etc.). Only then can you determine the true impact, and either avoid suppliers using the situation as an opportunity to hike prices or work with them to find a way forward.

On a more positive note, so long as preparations are made now, we see a bright light at the end of the tunnel for British retailers and their suppliers: Half of UK shoppers believe ‘made’ or ‘grown’ in Britain is a sign of good quality produce, according to our Shopper Experiences Survey, carried out by YouGov with 4,000 consumers.

Whatever the challenges and/or opportunities that Brexit presents, a no-deal Brexit will mean no ‘grace’ period for retailers and suppliers to gradually come to grips with a new world order. Those who don’t prepare risk being forced to make snap decisions, risking the reliability, quality and safety of their supply chains. The shrewdest are acting now to be one step ahead of the competition.